Currency Markets React to Fed’s Rate Policy and Bank of England’s Decision

The U.S. dollar experienced a broad weakening on Thursday as investors speculated that the Federal Reserve has concluded its interest rate hikes, following the recent decision to maintain rates at their current levels. Simultaneously, the British pound remained firm after the Bank of England opted to keep its interest rates at a 15-year high, emphasizing its reluctance to reduce rates in the near future. The perception that U.S. interest rates may have reached their peak led to a boost in risk appetite, propelling equities and high-yielding assets, including commodities and emerging market currencies.

Federal Reserve Chair Jerome Powell did not entirely rule out the possibility of another interest rate hike. However, with the funds rate target ceiling already at a 22-year high of 5.5%, he stated that the risks of both doing too much and doing too little were now balanced. As a result, markets interpreted this as a signal to maintain the likelihood of a rate increase in December at less than 20%.

Brad Bechtel, the Global Head of FX at Jefferies in New York, conveyed his opinion that the Federal Reserve has probably concluded its series of interest rate increases. Nevertheless, he recognized the logic behind considering another rate hike, primarily due to the ongoing resilience of the U.S. economy. Bechtel emphasized, “Simultaneously, there is widespread attention on the potential economic slowdown, and the indicators for inflation are moving in the desired direction. The specific magnitude of a potential 25-basis-point rate hike may be subject to debate, but the overarching consensus is that the Federal Reserve is, for the most part, at or near its peak point.”

In late morning trading, the dollar index, a measure of the greenback’s performance against six other major currencies, recorded a 0.3% decline, settling at 106.12.

The British pound demonstrated strength, surging as much as 0.6% against the dollar to reach $1.2225, marking its highest level in 1-1/2 weeks. This rally was in response to the Bank of England’s 6-3 vote in favor of maintaining rates at a 15-year peak of 5.25%. Furthermore, the central bank made it clear that rate reductions were not on the horizon. Sterling was last seen up 0.3% at $1.2176.

Norway’s central bank also adhered to expectations by leaving its benchmark rate unchanged. Nevertheless, it signaled a potential increase in borrowing costs the following month unless inflation demonstrated a sustained decline. Consequently, the dollar edged up 0.1% against the Norwegian crown, reaching 11.19.

The euro experienced a 0.6% rise against the dollar, amounting to $1.0635. Against the Swiss franc, the dollar declined by 0.4% to 0.9042 francs.

In contrast, the dollar fell by 0.4% against the yen, settling at 150.275. This decline came after reaching a one-year high earlier in the week. The yen has faced challenges in gaining traction, even after the Bank of Japan announced a relaxation of its yield curve control policy earlier this week. Following the announcement, the yen reached a one-year low of 151.74 per dollar and a 15-year low of 160.83 per euro. This led traders to closely monitor the possibility of intervention to support the currency.

Sources indicated that Kazuo Ueda, the central bank’s governor, would continue to dismantle its ultra-loose monetary policy and aim to exit the accommodative regime, which has been in place for a decade, sometime next year.

The Australian dollar, which saw a 0.9% increase on Wednesday, continued its rise, gaining another 0.5% on Thursday and reaching a near five-week high of US$0.6456. The New Zealand dollar also reached a two-week peak of US$0.59107.

Bitcoin, which is sometimes viewed as a proxy for risk appetite, broke the $35,000 threshold, reaching its highest level since May 2022. This rise in the cryptocurrency market reflected the overall boost in risk-taking sentiment in financial markets.